The Dos and Don’ts of Borrowing Money – SmartAsset
Top 5 Reasons Why You Shouldnât Co-Sign a Friendâs Loan
Co-signing your friendâs loan might seem like a nice thing to do. But it can put many things in your life at risk, including your finances, your credit score and even your friendship. While itâs possible to co-sign a friendâs loan and never face any negative consequences, it might not be worth it. Check out five reasons why you shouldnât co-sign a friendâs loan.
1. Youâll Be Responsible for the Loan
No matter how trustworthy or wonderful your friend may be, he might end up defaulting on the loan he took out. Anything could happen. Your friend could lose his job or find out that a relative needs help paying for medical treatment.
If your friend canât pay back the money he borrowed, you would have to pay for the loan if you co-signed it.
2. Your Credit Could Take a Hit
If you co-sign a friendâs loan and he misses a single loan payment deadline, your credit score could drop. If that happens, it might be harder for you to buy a house or get a low interest rate on a loan in the future.
If your friend fails to pay back whatever he owes, the lender might sue you first. In the lenderâs eyes, you are far more likely to pay back the loan since your credit score is probably higher.
3. Your Property May Be at Risk
Sometimes a co-signer will secure a loan with his or her own property. If you (the co-signer) put up your car or house as collateral and your friend doesnât pay back the loan, you could potentially lose your property.
4. You Could Destroy Your Friendship
If youâre forced to cover the cost of the loan you co-signed, you could end up resenting your friend. After all, it can be difficult to remain friends with someone who put you in a complicated financial situation.
5. It Could Be Harder to Get a Loan Later On
Co-signing your friendâs loan could make qualifying for another loan more difficult. For example, if you co-sign your friendâs car loan and then you try to take out a personal loan, a lender might reject your application. Co-signing your friendâs loan will affect your debt-to-income ratio (the amount of debt youâre paying off compared to your monthly gross income). A lender might not want to lend money to someone who already has a lot of debt to pay off.
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5 Things to Consider Before Getting a Personal Loan
Itâs a new year and if one of your resolutions is to get out of debt, you might be thinking about consolidating your bills into a personal loan. With this kind of loan, you can streamline your payments and potentially get rid of your debt more quickly. If you plan on getting a personal loan in 2016, here are some key things to keep in mind before you start searching for a lender.
Check out our personal loan calculator.
1. Interest Rates Are Going Up
At the end of 2015, the Federal Reserve initiated a much anticipated hike in the federal funds rate. What this means for borrowers is that taking on debt is going to be more expensive going forward. That means that the personal loan rates youâre seeing now could be a lot higher six or nine months from now. If youâre planning on borrowing, it might be a good idea to scope out loan offers sooner rather than later.
2. Online Lenders Likely Have the Best Deals
The online lending marketplace has exploded in recent years. With an online lender, there are fewer overhead costs involved, which translates to fewer fees and lower rates for borrowers.
With a lower interest rate, more money will stay in your pocket in the long run. Lending Club, for example, claims that their customers have interest rates that are 33% lower, on average, after consolidating their debt or paying off credit cards using a personal loan.
Related Article: How to Get a Personal Loan
3. Your Credit Matters
Regardless of whether you go through a brick-and-mortar bank or an online lender, you likely wonât have access to the best rates if you donât have a great credit score. In the worst case scenario, you could be denied a personal loan altogether.
You can check your credit score for free. And each year, you have a chance to get a free credit report from Experian, Equifax and TransUnion. If you havenât pulled yours in a while, now might be a good time to take a look.
As you review your report, itâs important to make sure that all of your account information is being reported properly. If you see a paid account thatâs still showing a balance, for example, or a collection account you donât recognize, youâll need to dispute those items with the credit bureau thatâs reporting the information.
4. Personal Loan Scams Are Common
As more and more lenders enter the personal loan arena, the opportunity for scammers to cash in on unsuspecting victims also increases. If youâre applying for a loan online, itâs best to be careful about who you give your personal information to.
Some of the signs that may indicate that a personal loan agreement is actually a scam include lenders who use overly pushy sales tactics to get you to commit or ask you to put up a deposit as a guarantee against the loan. If you come across a lender who doesnât seem concerned about checking your credit or tells you they can give you a loan without doing any paperwork, those are big red flags that the lender may not be legit.
Related Article: How to Avoid Personal Loan Scams
5. Not Reading the Fine Print Could Cost You
Before you sign off on a personal loan, itâs best to take time to read over the details of the loan agreement. Something as simple as paying one date late could trigger a fee or cause a higher penalty rate to kick in, which would make the loan more expensive in the long run.
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